CONSUMER, CITIZEN GROUPS ASK FCC TO REIMPOSE
FEDERAL OWNERSHIP LIMITS ON CABLE TV OWNERSHIP

WASHINGTON, D.C. -- A large coalition of consumer organizations and citizen groups has filed comments with the Federal Communications Commission (FCC) in support of reimposing a strict federal limit on cable television system ownership.

The coalition presented powerful new empirical and theoretical evidence to boost the justification for the limit. The groups also presented analysis of recent industry conduct to further their arguments.

The coalition said the FCC needs to reinstate the 30 percent ownership limit to prevent cable monopolies from dominating TV programming and Internet services, as well as to prevent them from blocking video competitors. The groups cited the recent wave of media mergers, including Comcast's plan to acquire AT&T Broadband, as evidence of why the FCC must reinstate the limit to prevent further erosion in the video market.

Last year, the U.S. Court of Appeals upheld the law that authorized the FCC to impose the ownership limit, but the court rejected the FCC's justification for how it constructed the limit. The coalition argued in its filing that there was overwhelming legal and factual support for a similar rule with a more thoroughly articulated rationale.

The groups pointed out that if the merger of AT&T Broadband and Comcast were approved, the consolidated company would own cable systems serving about 34 percent of multi-channel video programming distributor (MVPD) households, and more than 40 percent of total U.S. cable subscribers. AT&T and Comcast would have to shed about 3.5 million subscribers to comply with the limit supported by the groups.

Based on market structure and empirical analysis, the groups presented the FCC a detailed picture of the clear dangers to consumers and programming providers seeking to compete with cable monopolies if the 30 percent limit is not reinstated.

The coalition includes Consumer Federation of America, Consumers Union, Media Access Project, Center for Digital Democracy, the United Church of Christ, Office of Communication, Inc., the Association of Independent Video Filmmakers, the National Alliance for Media Arts and Culture, and the Alliance for Community Media.

The following is an executive summary of the report. To obtain a copy of the entire filing, contact David Butler at Consumers Union at (202) 462-6262.

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EXECUTIVE SUMMARY

The importance of the 1992 Cable Act's as yet unfulfilled directive, that the Federal Communications Commission (FCC) impose an effective limit on cable television system ownership, has been demonstrated by the fact that competition for video services has failed to develop over the last ten years:

The FCC has the clear power and obligation to adopt a stringent ownership limita-tion, as demonstrated in Part I of these comments. The 1992 Act has been upheld as con-stitutional, under the authority of the Supreme Court's declaration that the FCC is compelled to promote both competition and diversity. Although a panel of the U.S. Court of Appeals later rejected the FCC's justification for a 30% national ownership cap under that law, there is overwhelming legal and factual support for re-adoption of a similar rule, albeit with a much more thoroughly articulated rationale (Chapter I).

The language of the law could not be more explicit. Section 613(f)(2) of the Communi-cations Act requires the Commission, "among other public interest objectives," to:

In remanding the cable ownership issue to the FCC for further justification, the Time Warner II court did not weaken this Congressional mandate. Rather, it rebuked the FCC for laziness in presenting its facts and analysis, saying that a 30% limit would not stand unless the FCC did its homework.

Antitrust law alone would support imposition of a 30% ownership limit. However, the FCC is charged with going beyond what the antitrust laws would require. Even after the D.C Circuit's Time Warner II decision, the Commission can fulfill its Congressional man-date to promulgate a rule that will promote effective competition only by reestablishing a cap that is below what antitrust law alone would otherwise provide. Unlike antitrust law, which focuses on preserving existing competition, Section 613(f) mandates a limit that will "enhance effective competition."

Moreover, the FCC must also promote First Amendment values by taking such addi-tional steps as are necessary to enhance diversity. Although the court ruled that the Com-mission could not rely solely on a diversity rationale to impose its rules, enhancing diversity and competition remain the two primary goals that the Commission must meet in establish-ing a prophylactic, structural scheme. As described in Chapter II, policies to promote the "widest possible dissemination of information from diverse and antagonistic sources" have the full support of the Supreme Court. Thus what the Commission must do is articulate more persuasively the role of diversity, in conjunction with enhancing competition, and point to the additional evidence in the record presented by CFA et al. to support its conclu-sions.

CFA et al. demonstrate in this analysis that economic theory clearly identifies market conditions in which the abuse of market power is likely (Part II). It shows that the widely recognized economic characteristics of the cable industry make it prone to the abuse of mar-ket power, which the Congress feared. Chapters III, IV and V carefully define and de-scribe the measurement of market power, which are critical steps to understanding the structural problems in the cable industry. Chapter VI describes the unique vertical leverage that exists in industries that are based on communications platforms. This vertical dimen-sion must be taken into account to understand the incentive and ability of cable operators to discriminate against potential competitors and to distort competition.

CFA et al. demonstrate in this filing that the Commission has previously presented too narrow a view of the dangers to competition and diversity of allowing consolidation above a 30% level. By failing to describe its "open field" analysis more completely in the context of the overall MVPD market and its structure, the Commission presented the Court of Appeals (in Time Warner II) with an incomplete picture of the dangers inherent in exces-sive horizontal consolidation in this industry.

CFA et al. present a comprehensive explication of the highly concentrated MVPD market at the transmission, code, and content layers. The analysis demonstrates how the in-ability of cable's competitors to develop easily substitutable products has made it particu-larly difficult to develop competition and promote diversity.
The empirical evidence presented in Part III demonstrates how horizontal concen-tration and vertical integration in the cable industry, overlaid on an industry with substantial barriers to entry, render it vulnerable to abuse of market power (Chapter VII).

The CFA et al. analysis of cable industry behavior presents the Commission with concrete, contemporary examples of cable operators leveraging their market power to dis-criminate against competing video distribution mechanisms, known as conduit discrimina-tion (Chapter VIII). This strategy includes denial of access to vertically integrated pro-gramming and muscling independent programmers to withholding content from competing distribution facilities. It also exposes practices that discriminate against unaffiliated pro-grammers by denying access to the public served by cable distribution plants, known as content discrimination. Numerous concrete, contemporary examples of both denial of ac-cess and extraction of discriminatory rates, terms, and conditions are provided to illustrate how large cable companies can undermine competition and diversity in the program-ming/content market.

The performance of the cable industry supports the conclusion that it has and is exer-cising market power (Chapter IX). Prices are rising far faster than inflation. Consumers are denied choice by the industry's strategy of creating ever-larger bundles of services. Not only is the industry becoming more concentrated (as measured by the HHI index) but also it is overcharging consumers (as measured by the Lerner index), and capturing massive mo-nopoly profits (as measured by Tobin's q ratios). Each of these measures indicates that the overall competitive situation has become worse since 1992, when Congress charged the Commission with setting a reasonable limit on ownership.

Because cable operators virtually never compete head-to-head, policy makers and the public have been forced to rely upon the unkept promise that cross-technology competition will break the cable industry's monopoly hold on the multichannel video market. The clear evidence of the existence, persistence and exercise of market power indicates that these technologies-satellite and the Internet-have failed to live up to their promise. Part IV analyzes these two technologies and shows why they have not been, and are not likely to be able to discipline cable's market power in the foreseeable future.

Despite superficial claims that introduction of direct broadcast satellite (DBS) ser-vice and the emergence of the Internet have somehow eliminated the need for stringent ownership rules, CFA et al. demonstrate that these nascent phenomena have neither changed the overall picture of concentration nor obviated the need for a 30% limit. Chapter X pre-sents a broad range of data which show that DBS is not a substitute for cable. DBS remains nothing more than a niche product purchased by people who cannot get cable (40% of DBS subscribers cannot get cable) or viewers who are willing and able to purchase expensive specialty bundles, such as sports channels and foreign language services.

While the Internet is filled with potential and provides revolutionary functionalities that enhance people's daily lives by facilitating communications, it currently plays no meas-urable role in video markets. Chapter XI demonstrates that it cannot possibly discipline cable today, and its promise to do so in the future is still theory, not fact. Because the pre-ferred next-generation broadband Internet connections- which could deliver video-on-de-mand or similar video products- are owned primarily by large cable multiple systems op-erators (MSOs) that also have immense leverage over programming and Internet content, the chances that this technology can batter down the walls of the monopoly are slim. Those MSOs have rejected the open model of the first generation Internet by placing limits on us-ers who wish to stream video. They have turned their networks into "walled gardens" where users are surreptitiously nudged towards affiliated content providers, rather than allowed to roam free on an open Internet. Instead of disciplining cable providers, the Internet is be-coming an even more powerful tool for MSOs to extract monopoly profits from consumers.

Finally (Part V), CFA et al. present a specific quantified defense of the 30 percent limit based on the previous market structural analysis. Chapter XII shows that a limit of 20 to 30 percent is necessary to curb the market power of cable operators acting as "mo-nopsonists" (large buyers) in the national market. CFA et al. also demonstrate that a 20 to 30 percent limit was justified and remains so based on the "open field" analysis which the Commission formerly applied. In fact, CFA et al. demonstrate that an even lower limit would be appropriate in today's market.

In establishing a cable horizontal ownership limit, the Commission previously cal-culated that a 40% open field was necessary for new programming to succeed. However, given both rising programming costs and increased consolidation within the industry, CFA et al. show that the open field necessary for programming to succeed in today's marketplace must be significantly larger. Programmers today need to reach millions more viewers to cover their rising costs than when the FCC initially calculated the "open field." To preserve an "open field" sufficient to provide an incentive for entry of independent programmers, the Commission must reimpose a cap no greater than 30%.

Chapter XIII argues that the Commission must also promote diversity in setting a horizontal limit. CFA et al. demonstrate that ownership concentration negatively affects di-versity and civic discourse. Where the Commission identifies a zone of reasonableness based on purely economic considerations, diversity concerns should cause it to choose a number in the lower end of that range.

Based on overwhelming evidence of a highly concentrated market, enormous incen-tives to undercut competition and diversity in programming, and strong evidence of efforts to exercise this market power, CFA et al. urge the FCC to reinstate the 30% rule. The mar-ket structure analysis, supported by overwhelming evidence, is more than enough to satisfy the Commission's obligations under Time Warner II. Without establishment of a 30% or lower horizontal ownership limit, the FCC will fail to meet Congress's goal of enhancing effective competition, leaving consumers paying inflated prices for programming that fails to meet all their needs.